Solving the Income Challenge
If you retired in 1991, you might have built a portfolio of safe AAA-rated US Treasury bonds that yielded between 7.25% and 8.5% depending on when you bought them. One million dollars in Treasury bond investments might have created $80,000 in dependable annual income. When combined with social security and a pension, life was good!
Now consider retiring in September 2016 when 10 Year Treasuries pay 1.6%. That same million dollars invested in Treasuries creates only $16,000 in dependable annual income. Social security is underfunded* and pensions have been phased out at many employers. That sterling AAA credit rating of the US Government has been reduced to AA+ by S&P. Wow, how much has changed in 25 years!
So what is an investor to do in 2016? Here are six tips to consider to help solve the income challenge today.
Diversify Income: You have so many investment options. Some offer higher yields along with higher risks. Diversifying the source of income can help reduce your risk when a single investment does not perform well or if the rate environment changes.
Save More: It flat-out costs more to retire today with higher taxes, health care costs, housing costs, and potentially receiving less in the way of pensions and future social security benefits. Assess your current spending and your sources of future income and expenses. Part of the answer may be to save more.
Watch Inflation: In 1991, inflation was about 5% and today it’s below 1%**. Despite today’s low inflation, it could be higher in future years, so let’s look at an option to help deal with that risk. Treasury Inflation Protected Securities are issued by the US government and the principal and payments are indexed to inflation.
Timing Social Security Benefits: The longer you wait to take benefits until 70 years old, the greater the amount. Deferring your first check from your full retirement (age 65-67 depending on date of birth) to 70, means 8% per year more income for the rest of your life! However, if you have health issues, you may want to start your benefits earlier.
Consider Stocks: If you retire at 65, and live to 90, you’ll have 25 years to finance. Over longer period like that stocks may be an important component to an investment portfolio. From 1928 to 2015, the S&P 500 has returned 9.5%, however from 2006 to 2015 that dropped to 7.25%***. In any case, stocks historically have helped mitigate the risk of future inflation by growing along with the economy.
Keep a Buffer: Once you have built an income portfolio, you don’t want to be forced to liquidate assets during down markets. One strategy is to keep 6 months to two years of a cash buffer in safe liquid accounts and to replenish those accounts from time to time. This can help avoid selling quality investments when they are down.
*SSGA.com, “by 2035…taxes will be enough to pay for only 75 percent of scheduled benefits” **Statistica.com ***Federal Reserve database in St. Louis
Scot Millen and Nancy Briguglio are registered representatives with and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Brightworks Wealth Management are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
US treasuries may be considered “safe” investments but do carry some degree of risk including interest rate, credit and market risk. They are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Values will change with changes in interest rates.
Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Stock investing involves risk including loss of principal.